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Cover Story

“Players will look more at Project Acquisitions”
Sanjay Kabra, Chief Financial Officer, Sunil Mantri Group
Issue Date - 18/08/2011
B&E: Does the real estate sector environment favour consolidation at a time when the RBI move to raise the repo rate by 50 bps comes as a shock for the industry, as the burden on account of increased rates of interest will hit the developers as well as home buyers?
Sanjay Kabra (SK): The 50 basis point rise accentuates the troubles ailing the realty industry. Both developers and customers are adversely affected. On a thumb rule basis, a 100 bps increase in interest rates increases the EMI per lakh on a 15 year loan by Rs.60 per month. Considering the 3% rise over the last year, this translates into a rise of Rs.180 per lakh in the EMI. Based on an average loan size of Rs.20 Lakh, this mean a rise of Rs.3600 in EMI to the total EMI liability of Rs.23,000 to Rs.24,000 per month. In that sense, the rise clearly hurts more than the inflation faced by consumers in their other personal heads of spend like food and non-food items.

Industry captains cannot ignore the need to consolidate. The consolidation I am referring to is internal consolidation by shedding non performing or slow moving assets and/or businesses, fast tracking projects with promise and potential and also giving a major thrust to sales by meeting market expectations on product and pricing.

B&E: Do you feel that it is a failure of the RBI to not address the concerns of home buyers and developers?
SK: The RBI is doing what it is mandated to do – to keep inflation under control. The Governor has only the monetary tools at his disposal – so that is what he can use. The governments of the day have to macro manage the economy. So even though the RBI move is hurting the industry, it would be unfair to blame RBI.

B&E: CREDAI has been suggesting reforms to the government on bringing down prices and increasing realty growth; but with RBI’s move to raise the repo rate by 50 bps, it seems a distant dream for the industry to achieve those objectives. So, what else can the industry do to meet the end?
SK: Why CREDAI alone? Everyone would like low interest rates, high growth rates and lower profits. Real estate prices have increased by 25 to 30% more than a year back, when interest rates were benign and the economy was recovering after the 2008-09 slowdown. So whilst rate hikes hurt, we cannot connect the real estate prices too much with the prevailing interest rate changes alone. There are several other factors like demand/supply, public sentiments and the developers’ price/profit intent at play.

B&E: The cost of funding is going be higher as banks are bound to increase their lending rates, the industry is facing a crunch and the fund gap over the next five years alone as high as as $70 billion. Don’t you see these as ideal conditions for consolidation? What could be the potential targets?
SK: As for current valuations and potential targets, I do not foresee mergers & acquisitions kind of consolidation taking place in the real estate sector, so I am not commenting on valuations and targets. As a matter of fact, bank funding is still the cheapest source of funding for the realty industry.

With the prospects of raising funds from an IPO pretty much bleak, the industry is compelled to look at much costlier private equity, private finance, and NBFC’s to fund the land costs. The problem that sucks the industry is the denial of bank funding for land, which is an intrinsic raw material for the industry. Price/earning ratio of the real estate sector is 18 times the earnings per share. I don’t foresee any takeover targets.

B&E: What are the challenges to consolidation in the real estate sector? How relevant is it to the target of fulfilling the additional housing demand of 37 million units in the next Five-Year Plan, which would need around $3.2 trillion in investments?
SK: I reckon that industry players with the capacity would look at project acquisition opportunities rather than at M&A opportunities. It may be more prudent to do this rather than attempt wholesale takeovers and acquisitions of companies. The latter option could tag along lot of baggage that the acquirer may really not want or like. The chaos of urban explosion is already a reality. Chaos is very much a clear and present adjunct of economic growth story of India. So slums and high rises inevitably coexist in Mumbai. Traffic is and will continue to be a nightmare in all the metropolitans. The metros will arrive 5 years too late, except in Delhi, which alone has received a generous dose of infrastructure and was planned for rather well. Capacities of Indian real estate players may not be adequate to meet the overwhelming needs of housing & urbanization if the supply needs to be ramped up on a radical basis. FDI participation is forthcoming in FDI compliant projects, so there is already some degree of offshore participation. Urban developments may be small in size but they can involve huge investments.

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